An increasing number of new investors are opening up to the idea of beginning their investment journey with mutual funds rather than traditional instruments such as fixed deposits. And why not? Mutual funds offer the scope for capital appreciation and many other benefits such as convenience, flexibility, and ease of investment. You can use an investment calculator to get a better idea of how well an investment might fare. However, when it comes to picking their first fund, new investors often face decision paralysis and rightly so, considering the plethora of mutual fund options available.
While the task of picking your first fund should not stop you from startingyour investment journey, giving a good thought to what your first fund should be is definitely warranted.Why is your first fund so important?
Your first mutual fund could set the tone for the rest ofyour investment journey by helping you develop confidence in investing in the marketsandgoes on to build discipline in your investing habits.
So, what should your first fund be?
It is common for most new investors to chase returns and select funds solely on the basis of past performance. However, this is not the ideal way to go about choosing funds, as past returns does not guarantee future performance. Hence, rather than focusing on the recentperformance of the fund, select afund that alignswith your future financial goals as your first fund. The main objective of investing in mutual funds should be long-term wealthcreation and not short-term returns.
Another common financial challenge new investors face is that of tax saving. Very often, they end up investing in traditional tax-saving products only for the sake of saving taxes and get their funds locked up for long periods.
One category of mutual fund that can address both—the need for capital appreciation and requirement of saving taxes – isan ELSS or equity-linked savings scheme.
What is An Equity-Linked Saving Scheme (ELSS)?
Under Section 80(C) of the Income Tax Act, 1961, an individual can avail tax deductions on investments of up to Rs.1.5 lakh in a tax-saving instrument in a financial year. ELSS is one such tax-saving product.
An ELSS is an open-ended scheme that invests in equities across all sectors and marketcaps while also qualifying for the 80(C) tax exemption, therefore offering thedual benefit of aiding wealth creation and saving taxes.
Further, ELSS offers the scope of generating significant returns over the long term owing to its diversified equity-oriented portfolio. Moreover, unlike other tax-saving options, ELSS comes with a relatively lower lock-in period of 3 years. And while this means that you cannot withdraw/redeem your investments for 3 years from the date of investment, there are numerous benefits of the lock-in feature.The lock-in period not only inculcates investing discipline but can also aid compounding, that is, gaining returns on your returns as they get reinvested.
Apart from these benefits, in case you are new to investing and do not have the money to invest at one go, you can always start a systematic investment plan or SIP in ELSS.SIP allows you to invest small amounts in a mutual fund scheme at pre-determined intervals. So, if you have a tax-saving and investment goal for the year in mind, you can simply split this in smaller instalments and invest throughout the year via SIP. This way, you can address both the tax-saving and investment need through this one investment, relieving you from the hassle of a rushed tax planning exercise at the end of the year and from having to time the market for investments.
The first step is always the most difficult.
Understandably, choosing your first fund can be daunting. Therefore, when you are just beginning to invest in mutual funds, it makes sense to pick your first fund such that it is simple to understand, convenient to invest in, and serves your financial goals. An ELSS can help target two financial goals with just one investment, and thus, canbe seen a smart choice as your first fund.